Nearly nine in ten Coloradans expect their retirement lifestyle will be similar or better to the one they had during their working years. Yet only 39 percent of Coloradans say they have a clear vision for retirement.
So why aren’t more Coloradans ready for retirement? The reasons stated in a recently released report might be surprising to some. The study makes clear that a lack of investment knowledge and access to employer-sponsored savings plans play a significant role in the gap between retirement dreams and savings realities.
Origins of the study
In 2019, the Colorado Legislature created the Colorado Secure Savings Plan Board to better position Coloradans for a secure retirement. The Board’s eight members include PERA Chief Investment Officer Amy C. McGarrity and Colorado Treasurer and PERA ex officio Trustee, Dave Young.
During the past few months, the Board has reviewed research and presentations from a variety of outside organizations. A study presented by Corona Insights provided a particularly in-depth look at the current retirement landscape in the state, identifying obstacles Coloradans face and possible solutions to address each issue. The Board has not yet made a specific set of recommendations, but this report gives a framework to use as they continue their work.
“The cost of doing nothing is extreme. [Doing nothing] would potentially cost taxpayers billions of dollars.” – Amy C. McGarrity, PERA Chief Investment Officer
This study did not specifically single out PERA members in any way, and the Board’s work is largely geared toward bringing retirement services to those in the private sector who currently lack access to retirement savings opportunities. But PERA members should still pay attention. “The cost of doing nothing is extreme,” McGarrity said. “[Doing nothing] would potentially cost taxpayers billions of dollars.” One study the Board reviewed actually calculated the price for what insufficient retirement savings could cost Colorado taxpayers: nearly $10 billion from 2021-2035. This cost is due to the projected increased need for services and lost revenue.
The report’s primary findings can be summarized into five broad topics:
1. Improve the general awareness about the importance of retirement planning.
Currently, only 56 percent of Coloradans have a financial goal for their retirement savings.
Research often suggests learning about financial concepts early in life helps. To that end, the study recommends supporting financial education for students, educators, and parents. For adults, creating a public information campaign with particular attention paid to low- and middle-income residents could improve outcomes. McGarrity noted that making financial education more widely available is a good first step, but a larger cultural shift is needed for this awareness to truly take root.
2. Make savings systems more widely available, simple, and automated.
The report states that “only 60 percent of Colorado adults under 65 have access to a workplace retirement plan, and only 53 percent use a workplace retirement plan.” Addressing this goal requires making retirement savings more widely available, simple, and automated.
First, people who currently don’t have access to retirement plans must gain access. This issue is black and white. Across the country, households with access to a workplace plan have 790 times more retirement savings than households without access to retirement plans, “even after controlling for characteristics such as age, income, and other predictive factors.” Offering a low-cost, low-maintenance, Colorado-run IRA to those who currently have no other option would be an immediate improvement.
But simply having access to a plan is not enough. An effective retirement savings plan requires opening the account in the first place, contributing consistently, and selecting appropriate investments. Each of these actions can be made easier. McGarrity said that reducing friction, even in small ways such as making enrollment an opt-out process rather than an opt-in process and making target date funds the default investment option, can have a significant positive effect on savings outcomes.
3. Coloradans need to know where to get information they can trust, and employers can serve an important role.
Currently, two-thirds of Coloradans said they want to know more about retirement savings. But many participants shared a suspicion about financial advisors being salespeople rather than advisors.
People are unlikely to act on information they don’t trust. When it comes to financial matters, employers often serve as brokers of trust, which can make them valuable partners. However, the reality or perception of high costs and additional administrative duties leads some employers to forego this opportunity. Creating successful partnerships with employers will require limiting costs and additional work. A state-sponsored advisory program, including online tutorials, could do just that—increase access to financial education without putting an undue burden on employers.
4. Coloradans need help thinking about investing versus saving.
Currently, “45 percent of Coloradans have an investment philosophy that is ‘somewhat conservative’ or ‘very conservative,’” according to the study, and about the same number report not knowing where to invest their savings.
The study states that experts believe “people often are too conservative in their investments under the belief that retirement savings should be ‘safe.’” However, pursuing “safety” in the form of avoiding risk can reduce potential returns, which, counterintuitively, can increase the risk of outliving retirement savings. Instead of pursuing a notion of “safety” by minimizing risk, investors should consider having a diversified portfolio with an overall risk level that’s appropriate to their age and goals.
Choosing an appropriate investment strategy is a highly personal decision, and it can seem complex. But a mix of educational opportunities, trustworthy advice, understandable investment options, and the option to use target date funds are all potential ingredients of a comprehensive solution.
5. Some Coloradans realistically cannot save for retirement.
Currently, 43 percent of Coloradans stated current income levels as a major or moderate barrier to saving for retirement. Additionally, the Colorado Center on Law and Policy estimates that one in four Coloradans live below the subsistence line.
The experts consulted in the study noted that this issue is complex, with causes and solutions extending well beyond the scope of retirement savings. Nevertheless, low income levels do have an effect on the overall retirement readiness in Colorado, and it is a component lawmakers should consider when considering the cost of doing nothing.
How PERA stacks up
PERA’s Defined Benefit and Defined Contribution Plans weren’t studied in this report. But the report’s recommendations can serve as a reference point to see whether PERA’s products and services are in line with best practices.
All PERA members are part of a retirement plan. While this sounds obvious, only 53 percent of all Coloradans have access to and participate in a retirement plan at work.
PERA members have access to an array of retirement information, including free educational opportunities. PERA’s Field Education department holds hundreds of in-person and web-based sessions annually. PERA partners with more than 400 employers across the state to provide on-site and web-based education as well. In 2019 alone, PERA staff conducted 1,715 workshops and presentations at employer locations, reaching 31,636 members.
Finally, PERAPlus provides members with the option to save additional dollars for retirement. “Younger members especially need to take advantage of these additional saving opportunities,” McGarrity said. “They are pretty compelling from a cost perspective.” PERAdvantage target date funds are the default option in PERA’s 401(k), making it simple for members to diversify and use risk appropriately.
When the Board’s work wraps up in the coming months, the work that lies ahead for Colorado will just be beginning. The Board does not have the power to create or implement policy. Instead, the Board will present its findings and recommendations to the General Assembly, who can incorporate it into legislation. The details of what legislation might look like are still unknown. But one thing is clear: time matters. “It’s important to act now,” McGarrity said. “We can’t keep putting this off. It’s time to think long-term.” The cost of inaction is too high.